A Riksbanken video gave me a good laugh, and a 350th birthday is cause for celebration and reflection. On today’s episode: (1) very briefly how did it start. (2) its relationship with the Euro. (3) its policy goals. (4) and finally its role in the Nobel Prize of Economics. As always, I can be reached for comments, feedback, or questions on twitter or via my website www.thebanksterpodcast.com.
I am Alexander Bagehot and you’re listening to The Bankster Podcast, the only podcast dedicated to the fascinating and ever more consequential world of central banking.
A light-hearted video came across my twitter feed last week. The audio and subtitles were in a nordic sounding language that I didn’t understand. And it took me a surprisingly long 10 minutes to find a version with English subtitles. The 55 second video is called, “Stefan Ingves orders 350 birthday cake” and follows the leader of the Swedish Central Bank called the Riksbanken. As the Governor concludes an executive committee meeting, a woman from the committee turns to Governor Ingves and says, “I had one more thing, what about the birthday cake?” And after a brief pause the Governor responds, “Yes, I can take care of that.”
The scene then turns to Governor Ingves in his office on the phone with a bakery. “How much does a ten piece birthday cake cost?” he asks. “Do you charge extra if I want something written on the cake?”
His first request, “Sveriges Riksbank 350 years” is much too expensive, “Per letter?” he questions in exasperation. “Ok, let’s just do Riksbank 350 years” he tries, getting a second estimate. “Actually,” he adds, “we could skip years - just write Riksbank 350. That will be enough.” The scene cuts to a simple navy blue cake with striped candles and the shortened celebratory phrase, “Riksbank 350”. With a final few jovial chords the video ends.
The video made me laugh and I’ll include a link in show notes to today’s episode. Which by the way, it’s been a few months since I’ve given a plug to the email newsletter. It’s a very simple email that accompanies each episode. It’s a great way to dive deeper into the material covered in the Centralverse. You can sign up for the newsletter at the website www.thebanksterpodcast.com.
Anyways, besides making me laugh the short clip reminded me of a few other efforts and news headlines in regards to central bank communication. The Fed recently released a new whiteboard video drawing out some Fed 101 basics. And as a professor from Georgetown pointed out to me on twitter, a recent interview video from the Bank of England about how money is created in the modern economy was even short-listed for a best documentary award.
Central Banks have been historically high-browed, difficult to read and understand institutions. They have worn their unofficial, apolitical technocrat title as a badge of honor. And have taken great pride in the opacity of their statements and actions. Alan Greenspan, more about him in the previous episode, told one congressman, ““If I seem unduly clear to you, you must have misunderstood what I said” and to another, “I know you believe you understand what you think I said, but I am not sure you realize that what you heard is not what I meant,” (as quoted in Chapter 22 of Sebastian Mallaby’s book, “The Man Who Knew”). Those sentences are tongue in cheek incomprehensible.
This is just one example of the sentiment about Central Banking communication just 20 years ago. Central Banks are slowly starting to reach out to the broader public and are beginning to realize that an understanding of the roles and functions of the central bank might be beneficial. The bar for good communication is pretty darn low - for example the Federal Reserve, late last year, made an upgrade to their website bringing it from early 1990’s website aesthetics to the early 2000’s at most in my humble and irrelevant opinion.
But anyways, the Riksbanken video gave me a good laugh, and a 350th birthday is cause for celebration and reflection. So that’s what we’ll do for the rest of today’s episode. (1) very briefly how did it start. (2) its relationship with the Euro. (3) its policy goals. (4) and finally its role in the Nobel Prize of Economics.
How did it start?
Oldest Central Bank in the world, started in 1668. But the foundation for the bank was actually started a little over a decade earlier, in 1656, with a man named Johan Palmstruch. The bank was created to help fund the wars of Charles X Gustav’s. It was called Stockholms Banco and it had quite the successful run. Heavy metal plates were being used at the time as money, and Stockholms Banco allowed citizens to deposit the metal plates at the Bank in exchange for a “receipt of deposit”, which they could then turn around and use as money. According to the official website of Riksbanken these were the first bank notes in all of Europe.
This continued for a few years, but the bank stopped using the amount of copper plates they had in the vaults when deciding how many banknotes to issue. Fear spread about the true value of the banknotes and what we now know today as a classic bank run began. The run not only devastated the bank but it devastated the life of Johan Palmstruch. According to the official history from the Riksbanken website, “On 22 July 1668 Palmstruch was dismissed as director and sentenced to the loss of his privileges. He was banished for life and ordered to compensate within six months for ‘all the deficiency and shortage in the Bank that can demonstrably be proven’. If he failed to pay what he owed, he would be executed. The Council considered the sentence [7 months later] and some members clearly found it too harsh. Palmstruch was reprieved but would remain in jail. Chancellor De la Gardie came to his support and argued ... that Palmstruch be released, which he was. He died a year later.”
Although Stockholm Banco and its founder came to a tragic ending, the benefits and potential of a strong bank were not lost on those in power at the time. A longer video, produced by the Riksbanken, summarizing the 350 year history put it this way, “The aristocracy had discovered that a bank was rather convenient, so they got the support of priests and the bourgeoisie to start a new bank in 1668.” And thus, out of the ashes of the Palmstruch’s failed bank, a new one was born - the Riksbanken, celebrating its 350 birthday this year.
The Riksbanken’s relationship with the European Central Bank.
Now, unfortunately due to my rather shallow understanding of the structure and format of the ECB and the Euro in general, this part turned out to be a little bit more complicated than I expected. See, Sweden is a member of the European Union; however, they are not part of the Euro Area. The Euro Area refers to the use of the shared currency, the Euro. So Sweden is part of the political body of the European Union but they use their own currency, the Swedish Krona. And because the principal role of a Central Bank is to control the supply of currency, Riksbanken is not a member of the European Central Bank. However, just to confuse us over here across the pond, there is a another group called the European System of Central Banks that combines the European Central Bank members as well as the National Central Banks of countries that are in the European Union but not in the European Area.
Holy Macaroli! That’s enough of that for one episode. Basically, the relationship status of the Riksbanken and the ECB on Facebook would be “it’s complicated”. Besides giving me a slight headache trying to keep track of all of the different versions of these European groups - it reminded me that the Bankster Podcast hasn’t done an episode about the European Central Bank. This will be remedied! I have a lot to learn, but I’ll bring you along as I do so.
The policy goals of the Riksbanken.
Now that I’ve demonstrated my lack of understanding of the European Central Bank you’ll see why this third point was of interest to me. See, the Federal Reserve’s two main goals (known as the dual mandate, also quick sidebar - I will do an episode about the lesser known mandates of the Federal Reserve at some point as well). Anyways, the Fed has twin goals of maintaining maximum employment and a 2% inflation rate. In the Centralverse this dual mandate is actually the exception and not the rule. The Riksbanken, like most central banks in the world, actually only have one official goal - inflation targeting.
At the bottom of each page on the Riksbanken’s website is the phrase, “We ensure that money retains its value…”
50 years ago, on the 300th birthday of the Riksbanken the central bank made a donation to the Nobel Foundation. This donation was used to create the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Although the prize in economics was not included in the original list of Nobel’s, it has been treated as such since the Riksbanken brought it to life 50 years ago. If you had heard of the Swedish Central Bank before this episode chances are this is where you’d heard it from.
And that concludes today’s episode! Happy Birthday to you Riksbanken. We just cracked the surface today, but we covered a lot of ground: from a very brief version of its origin story, its relationship with the Euro, its policy goals, to its role in the Nobel Prize of Economics. Here’s to more content from the Centralverse like the little video of Stefan Ingves ordering the birthday cake.
Today’s episode was written, edited, and produced by me, Alexander Bagehot. Go to www.thebanksterpodcast.com to sign up for the show notes, so you can get direct links to all the great content used in today’s episode. Thanks to all of you for listening, and I’ll see you next time on The Bankster Podcast!